FHA Mortgage—The Wrong Choice?

real-estate-seesawThe venerable FHA loan has been an important path to home ownership for moderate-income buyers since 1934, when it came into being as part of the National Housing Act. Since that time, some 35 million families have used the federally insured mortgage program to become homeowners with very small down payments.

FHA became even more prominent in the recent crisis, as loans for borrowers with lower credit scores disappeared overnight. As the country lurched out of the Great Recession, FHA found that their insurance pool to cover foreclosure losses was drying up. They decided that increasing the insurance premiums would be the best way to replenish it and preserve the program.

FHA’s mortgage insurance premiums have been marching higher for several years. At present, there is an initial premium of 1.75% added to the “base” loan amount, plus 1.35% paid monthly. For a $300,000 purchase, this amounts to $5,066 initially, and $331 paid monthly. Although it was once possible to eliminate the insurance after about 10 years, FHA mortgage insurance is now permanent. The only way to remove it is to refinance into a conventional loan.

Even though interest rates for FHA loans are lower than for conventional mortgages, they are still a very costly option for most homeowners. A buyer with a credit score of 720 will get a conventional mortgage at a rate of around 4.5% (no points). With a down payment of 5%, that borrower can expect a monthly mortgage insurance premium of $270 (.69%)—and the lender will allow the insurance to be canceled once the loan reaches 80% of the home’s value. If the property appreciated at 4% per year, the buyer would be able to drop the mortgage insurance in less than three years.

The FHA loan would have a slightly lower interest rate—3.75% with no discount points—but the buyer would add the $5,066 initial premium to the loan, in addition to paying a monthly premium of $331. The buyer with a conventional loan will pay only slightly more initially:

MI compareEven though the conventional payment is $107.00 higher, the buyer will be able to drop the mortgage insurance within two or three years, depending on appreciation. Once that happens, the difference is significant: while the FHA buyer will be saddled with costly mortgage insurance for as long as he has the loan, the conventional buyer’s payment will drop to $1,444—$252 lower than for FHA.

An FHA loan is useful in certain cases. There are adjustments to the rate for lower FICO scores, so a buyer whose credit scores show some battle scars may still be better off with the government insured program. There may also be those who are struggling just to save the 3.5% down payment. For those hopeful buyers, the additional 1.5% in down payment could be a major hurdle.

Still, every buyer entering the market should be aware of the real cost difference between FHA and conventional loans. Saving up the additional 1.5% down payment could be a good investment.


Posted in Down Payment Assistance, FHA mortgages, First Time Home Buyers, Inside mortgages, Mortgage insurance, Refinance | Tagged , , , , , | Leave a comment

Getting Real (Chronicles of Running)

roger and me

Roger and Me. That’s Roger Bannister on the left, crossing the line in under 4 minutes for the mile. That’s me on the right, 55 seconds slower–and 9 years after his historic run.

Years ago, as I was embarking on a selling career, I learned that success involved setting goals—audacious ones. Even possibly unattainable ones. A “goal” that was like an Easy A class wouldn’t count; there has to be the real possibility of failure.

I learned that this goal (sometimes called a BFHAG, for Big Fat Hairy Audacious Goal) had to be specific. It also had to be written down and consulted regularly.

One more thing: you had to make it public. You couldn’t just put your goal on a post-it and stick it under your blotter. You had to open yourself not only to the possibility of failure but of public failure. Where the mind (and legs) feel like quitting, the ego may carry us through.

People who know me are aware of my rekindled passion for running. I have mentioned to some friends that I have been considering the commemoration of my 70th birthday next year (gulp) by running a marathon. That’s a little jaunt of 26 miles, 385 yards, kids. If I hit my goal time, that means putting one foot ahead of another without stopping for 4 hours, 25 minutes.

The goal has been somewhat nebulous up to now; my birthday is March 20th, and there are plenty of races in 2015. Maybe next October? November? That’s a LONG way away.

Except: Modesto. March 29, 2015. The date is right. There are no hills. The weather will be perfect. I have time to train—7 months.

There are no excuses—so Modesto it is. Now all my thousands hundreds several fans and followers know it, too.

Oh, and I almost forgot to mention: it’s a sanctioned Boston Qualifier race. That means if I hit my goal time (4:25), I’d be eligible to enter the most revered race of all: Boston.

Sh*t’s getting REAL now.

Posted in Chronicles of Running, Personal | Tagged , , , | 2 Comments

A Minor Improvement in FHA Mortgages

HUD-FHA logo

FHA loans are about to get a tiny bit less expensive

The FHA loan program has been in existence since 1934. It provides government support for low to moderate-income borrowers to buy homes, offering small down payments (currently 3.5%), low interest rates and flexible underwriting standards.

These attractive features come with a price, however. The higher risk associated with the small down payment makes mortgage insurance a necessity. The borrower pays the premiums in two ways. The up-front premium, 1.75% of the base loan amount, is added to the loan. Thus, a buyer paying 3.5% down for a $300,000 home will have a $294,566 loan amount—98.2% of the purchase price.

FHA also charges a monthly renewal of 1.35%. This would amount to $325/mo for the $300,000 purchase. This is more expensive than the private mortgage insurance (PMI) charged on low down payment conventional loans. Conventional PMI for a 95% loan would cost between $128 and $273, depending of credit score. Moreover, the FHA insurance will be in place over the life of the loan. Lenders will cancel PMI once the loan to value ratio drops to 78%, based on the market value of the property.

There is another, rather sneaky cost to FHA loans. When the borrower pays off an FHA loan, whether by refinancing or by selling, the FHA lender charges interest after the payoff, to the end of the month. If you are paying off a $260,000 FHA loan with a 4.5% rate, you’ll pay a full month’s interest even if you pay the loan off on the first day of the month. That interest would amount to around $975. Conventional lenders charge interest on a per diem basis—a significant absence of rip-off.

There’s some good news on the horizon for FHA borrowers. HUD has just issued a new directive stating that these “post-payoff” charges are no longer allowed; as of January 21, 2015, lenders will charge only for the days the borrower has the money. Paying off that $260,000 loan on the second of the month will involve $65.00 in interest—not $975.

This will ultimately save consumers millions of dollars—and that is quite a “minor” improvement.

CORRECTION: My good friend, Doug Adamczyk, pointed out to me that the way I wrote this, it appears that the post-close interest goes away after January 21. The new rule takes effect for loans funded after that date; so if you pay off your your year-old FHA loan next March, you’ll still want to close escrow as close to the end of the month as possible.

Thanks for the heads-up, Doug!

By the way, this new rule came into being as a result of the Consumer Financial Protection Bureau’s rule limiting prepayment penalties.

Posted in Down Payment Assistance, FHA mortgages, First Time Home Buyers, Inside mortgages, Mortgage insurance, Refinance | Tagged , , , , , , | Leave a comment

What Running Has Taught Me

Regular readers of this blog know that I had an epiphany of sorts two and a half years ago;

4:50.5 Mile run

Crossing the line with a 4:50.5 mile time. May, 1963

the deadly combination of high blood pressure and high cholesterol led to what doctors called “a minor stroke.” Technically, it was a Temporal Ischemic Attack (TIA): a couple of microscopic clots flicking switches deep in my brain, progressively shutting down the right side of my body. Thankfully, I got treatment in time, so there was no permanent damage. That experience caused me to take my health seriously. Most importantly, I began exercising regularly. I made it a point to walk for at least twenty minutes every day. Walking led to jogging, then running, then increasing my distance. After some backsliding, I committed wholeheartedly to my new routine in August of 2013.

The results have been measurable. First, as my fitness has improved, my resting heart rate has dropped from 72 to 46. Second, I have lost more than 35 pounds—and I was not what anyone could call overweight when I started. I now take half as much blood pressure medication as I did immediately after the stroke. The lower heart rate is a direct result of my higher level of fitness. The welcome weight loss comes from burning more calories than I consume. It’s a simple matter of math: 3,500 “extra” calories burned results in one pound of fat gone.

There have been some surprises along the way. I was a middle distance runner in high school (my best time in the mile run was 4.50.5), but I did not exercise regularly until two years ago. While getting started was a struggle, the journey has given rewards far beyond my expectations.

Getting started is hard. It gets easier—MUCH easier. Let’s be honest. It is no fun at the beginning. Gasping for breath after jogging slowly for a block is unpleasant. The brain says, “Stop this foolishness—right NOW!” The body is a co-conspirator. Your oxygen debt seems insurmountable; your lungs scream for relief. After a couple of torturous weeks, you realize that you are running a little longer before you have to walk. Then you are running for the whole 20 minutes. After a while, the time goes so quickly that you extend it to 30 minutes, then 40, and possibly more.

After the first mile, running feels amazing. You may have heard about the “runner’s high,” attributable to the body’s production of endorphins during strenuous exercise. Whether a daily run produces this chemical is in dispute, but I can tell you that most days, I feel a sense of well-being and mental clarity during most of my run. I learned that I didn’t have to run fast to get into this pleasant mental state. Most days, my pace is around 10 minutes per mile (6 MPH). Some people can walk nearly that fast. Still, the benefit is there. Definitely.

Habit is a powerful force. When I started, I knew I’d have to create a habit. Without it, my innate excuse mechanism—we all have it—would keep me on the couch. So I resolved to get out the door every morning, rain or shine, no excuses allowed, for at least 20 minutes. After two weeks, I no longer had to persuade myself. It had become a part of my daily routine. I began recording my runs (or walks) on my phone. There many apps available—most are free for the basic versions. I started with MapMyRun, then added Strava. Seeing each day’s run on the app’s calendar kept me motivated. To be honest, calling my first months’ activity “running” is a stretch. But it was a start.

Not all addictions are bad. I’ll admit it: I am addicted to this. On those rare occasions when I skip a day, I feel edgy and unsettled. A critical part of my day is missing. My body—and my mind—have come to require this. As addictions go, I am quite happy with this one.

I have learned to pay attention to what my body is telling me. Anthropologists tell us that our bodies are designed for running. After all, the early hunter-gatherers had to be fleet of foot to survive. Today, we tend to insulate ourselves from the outside world—and from our own interior space. You have only to watch the astounding number of people with ear buds firmly implanted to realize this. I’m not maligning that nice bit of technology that lets us listen to our tunes without any distraction from the outside world; I often run with my iPod cranked up. There are also times that I like to pay attention to the rhythm of my footsteps, the sound of my breathing, the rush of blood through my veins. I often find myself in a sort of meditative state when I run iPod-free. I come back from the run invigorated and renewed mentally, as well as physically.

I learn what I am capable of by failing. Running as a way of life often involves exploring our own limitations. How far can I run without stopping? How fast can I run a mile? Three miles? Twenty-six miles? The only way to learn is to make an attempt—and fail. One recent Sunday, I set out determined to extend my weekly “long” run from six miles to eight. The day was very hot. Even though I was carrying water, when I reached four miles, I simply could not run another step. I had allowed myself to become dehydrated because of the heat. I was drinking regularly, but it was not enough. Now I know, and can avoid the problem in the future. It was an important lesson.

Can we derive life lessons from a running lifestyle? Certainly. Success in work and life often demands that we push ourselves past where we thought our limits were, and sometimes we fall short of the mark. Those of us who sell for a living often have times where we don’t feel like making one more call in search of a new client or customer. Making that call when we don’t particularly want to is no different from pushing ourselves to run the last half mile when we are tired and sore.

Becoming a runner involved setting goals. It still does. At the beginning, it was modest: get out the door every morning for at least 20 minutes. I knew that the only thing standing in the way of that goal was my own lack of resolve. I knew the goal was attainable and completely within my grasp, subject only to my own determination. Today, my running goals are more ambitious: increasing my weekly distance to 30 miles from 20; shaving two minutes from my one-mile pace; running a marathon.

Running has taught me that I am capable of more than I first thought—not only in the physical sense of running longer distances at a faster pace, but also in the mental toughness and discipline that leads to success in business and in life. It has taught me that I can silence the yawping inner voice that insists, “You CAN’T do this!”

Running has taught me that, even in the face of occasional failure, I can do better. It has taught me that I can be better.

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Ditching Your Mortgage Insurance

Dollar HouseI have been interviewed recently by several reporters working on articles about mortgage insurance. Their questions made me realize that many consumers are still confused about this important financial tool.

I have written several articles about mortgage insurance myself, but it occurred to me that I should offer a concise explanation of what MI is, how it works and why you may be happy it exists.

Someone borrowing more than 80% of the value of a property presents a greater risk of default. The lender wants to be protected from the possibility of loss, so they will require that the borrower get a policy of mortgage insurance (MI). This limits the potential loss if the borrower defaults on the loan.

The cost of MI varies with the loan-to-value ratio (LTV) and your credit score. Insurance for a 90% loan will cost .44%, or $110/mo for a $300,000 loan if you have a FICO score of 740 or higher. A borrower with a 680 FICO will pay a higher rate: .62%, or $170/mo for the same loan.

The lender will let you drop the MI once the LTV reaches 80%. Different lenders have different procedures, but in most cases, you can order an exterior-only appraisal to confirm the present value (it will cost around $325). If you’ve made your payments on time for at least a year, the lender will agree to drop the MI if the LTV is 80% or lower.

The news is not quite as good for FHA loans. The Federal Housing Administration recently decided, in its infinite wisdom, that the MI (currently 1.35%) must remain on the loan over its entire life. If your property has appreciated to where your LTV is 80% or lower, you’ll have to refinance into a conventional loan to get rid of MI. Even though the rate may be higher than your present FHA loan, the overall cost may drop enough to justify making the change.

Even though mortgage insurance may seem to be an unwelcome cost that benefits only the lender, the fact is that it can help you save money. If your property appraised for a lower price than you had hoped for, paying MI for a year or two can help you take advantage of today’s lower rates. Just be aware of your property’s value as it appreciates—your Realtor® would be more than happy to keep you informed—and get it removed as soon as your LTV drops to 80%.

Posted in Appraisal, Inside mortgages, Mortgage insurance, Refinance | Leave a comment

Housing Market Continues Its Positive Trend


There is definitely some good news about the housing market. CoreLogic has just released its latest report: home prices nationwide are up 11% in December compared to the year before. Part of this is the market correcting itself (prices had gone lower than they should have), but part is the continuing high demand for housing.

There are still many stories in the media about the supposed impossibility of getting a mortgage. Banks aren’t lending, they say. Credit standards are too high, so nobody apart from Daddy Warbucks can qualify for a mortgage.

I call bullpuckey. The process of getting a mortgage is more rigorous than it has been in the past—borrowers have to *gasp* document their income and assets—but the standards are not impossible at all. Anyone with a reasonable credit history and a cash down payment as low as .5% can become a homeowner.

Here’s the bottom line: real estate is still a great investment, not only for the value of having a roof over your head, but also because you can expect it to increase in value over time. I talk about why NOW is a good time to buy in an earlier article, “I Think We Should Wait.”

You can read the whole CoreLogic report here.


Posted in Credit, Down Payment Assistance, FHA mortgages, First Time Home Buyers, Inside mortgages, Investing, VA Loans | 1 Comment

Sometimes all it takes is a phone call

Credit report phone callMy new client sat in my office with his wife and two school-aged children. They had saved enough cash for a substantial down payment and wanted a mortgage pre-approval. They were applying for a jumbo loan to buy their first home. The criteria for these programs are often more strict than for Fannie Mae and FHA loans.

I filled out their loan application while they were in my office, then pulled a credit report. They had very low debt. The wife’s score was close to 800, but the husband’s was barely over 700—too low for the loan they wanted. The culprit was one recent 30-day late payment to a local department score. The more recent the derogatory entry, the greater its impact on the credit score. This one late payment—about $25.00 on a $200 account—was costing nearly 100 points, I estimated. This one late payment could prevent these hard working people from getting their new home.

I suggested that they call the credit office of the department store. They should point out that they are good, loyal customers and would very much appreciate having this one entry removed from their credit report. It was just an oversight on their part, and they have always kept their account current.

They were skeptical. “You have nothing to lose,” I assured them. “The worst that can happen is that the store refuses to change the entry, in which case you haven’t lost anything. It’s worth a phone call.” He agreed to try.

The next day, my client called me. “They’re going to send me a letter,” he said. “They’re going to change the credit report!” He was jubilant.

Three days later, he faxed me the letter from the department store. They had agreed to remove any late payments before the present time and to notify the credit bureaus. Oh, and P.S: Thank you for being such a loyal customer.

I sent the letter to the credit bureaus with instructions to update his file immediately (it actually takes around 72 hours) and to send a report with the updated credit scores. We will be able to issue the pre-approval for his new loan before this week is out.

The lesson here is obvious: one simple phone call to a sympathetic credit office can mean success.

Anyone whose credit score is presently too low to qualify for a mortgage should follow my client’s example. There are myriad ways to raise a low credit score.

Sometimes it’s as easy as one short phone call.

Posted in Credit, Down Payment Assistance, First Time Home Buyers, Inside mortgages, Personal Finance, Refinance | 1 Comment

The Appraisal Dartboard

dartboardMy client was ecstatic. After making offers on five different properties, he had finally gotten an acceptance. He had prevailed over three competing offers because his offer was more than $20,000 above the asking price.

I ordered the appraisal as soon as I got the purchase contract from the buyer’s Realtor®. I received it six days later. The appraised value was $20,000 below the price buyer and seller had agreed on. At this point, the buyer could walk away without losing his deposit—or he could ask the seller to reduce his price. This is what he did.

At first, the seller refused. “How did he come up with THAT value?” he demanded. “Mine is the nicest house in the neighborhood!” I explained to him that an appraisal is not a “dartboard” number. It is driven by data.

The appraiser first describes the home (the “Subject”) in a standardized way: square footage, bedrooms and baths, amenities, condition, lot size, etc.). Then he lists other properties in the area that are similar to the Subject (“Comps”) that have sold within six months. He describes the Comps in the same standardized way. He adjusts the value of each one to be the equivalent of the Subject. If one of the comps is 400 square feet larger than the Subject, he will subtract from the selling price of the Comp, using a per-square-foot factor based on area standards. In Dublin, for example, the appraiser used $55 per foot, which reduced the Comp’s price by $22,000. He will make similar adjustments for room count, lot size, condition and other factors.

After adjusting each Comp, the appraiser will calculate a weighted average of the adjusted selling prices to arrive at his “opinion of value.” This is the number the lender will go by. A property two doors down with a high listing price will not affect the appraised value, because sellers can ask whatever they want for their properties.

The seller realized that if he put the property back on the market, he’d be faced with the same problem with a new buyer and new appraisal. He lowered his price and the buyers closed escrow shortly afterwards.

Afterwards, to celebrate, we went to my favorite brewpub for a nice game of darts.

Posted in Appraisal, First Time Home Buyers, Investing, Negotiating, Refinance | Tagged , , , , , | 1 Comment

Missed Anniversary

calvin-hobbes-dancingToday, I discovered that an important milestone had gone by unnoticed. Two years and five days ago, my life abruptly changed. A small blood clot made its way through miles of veins and capillaries and lodged somewhere deep in the left side of my brain, flicking switches that were better left un-flicked. I had a stroke—technically a Transient Ischemic Attack, or TIA. They refer to this as a “mini-stroke,” but there is nothing “mini” about something that interrupts the blood flow to part of your brain and starts shutting down parts of your body.

I wrote about this event two days after it happened. People asked me, “Weren’t you scared?” The truth is, I wasn’t; even though I could have been incapacitated for the rest of my life, I was more interested in the procedures going on around me than in what kind of dire outcome there might have been.

The cause of this medical adventure was simple—and very common. High blood pressure (around 190/105 for those of you who like specifics) and moderately high cholesterol. That is a bad combination. Fortunately, because I got medical attention early, there has been no long-term damage. Now I take four pills every day—two for blood pressure, one for cholesterol and an aspirin to prevent future clots.

The most positive aspect of all this has been that I take my health seriously these days. Apart from taking those four little pills, I created a habit of exercising every day: two days in the gym with a trainer, walking/running a couple of miles the other days. The results have been gratifying: I have lost about 25 pounds without starving myself, and my blood pressure is typically 124/65—pretty much the numbers for a much younger dude. The doctor has been tapering off many of the medications I have been taking.

Here’s my real message: aside from my joy at being alive and vertical, I now realize that high blood pressure is a serious disease. It has no symptoms, and for many people, the first indication is a stroke or heart attack. Get checked.

And for those who say, “One of these days I’ll start exercising,” make it today. Even a short walk.

I’ll go with you.

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Obama Taps Brown Alumna for Fed Chair

YellenI’ll admit it: I’m proud of my alma mater, Brown University. There. I’ve said it. Since its founding in 1764, Brown has produced a long list of achievers: political leaders, inventors, authors, artists, scientists and more. (I know…some of you are saying, “How could they have gone so wrong with Parsons?” But that’s a story for another time) One alumna in particular, Janet Yellen, is about to make history.

The present Chairman of the Fed, Ben Bernanke, will step down in January of next year. President Obama will appoint Bernanke’s replacement, subject to Senate confirmation. The short list of candidates for his replacement have included Larry Summers and present Vice Chair, Janet Yellen. Two months ago, I made a case in this blog for Yellen’s appointment. Shortly thereafter, Larry Summers, who had been seen as the shoe-in for the position, withdrew from consideration. Did my article have anything to do with it? My vanity says, “of COURSE it did!”

Today, the news broke that Janet Yellen will be named as the next Chairman of the nation’s central bank—and the first woman to hold that post. This is welcome news for several reasons, not the least of which is that Dr. Yellen has been a consistent voice of reason with respect to the Fed’s monetary policies. Additionally, Larry Summers famously stated in a 2005 speech that (and I paraphrase) women statistically have mathematical ability inferior to men’s. However one might parse or spin his statements in that speech, it was generally interpreted as being dismissive of women. There is a certain poetic justice to Janet Yellen’s appointment to the post.

As Chairman, Yellen is generally seen as a “dove.” This means that she will in all likelihood continue Ben Bernanke’s accommodative monetary policies. This is unquestionably good news for the mortgage markets, since it is the Federal Reserve’s monthly purchase of mortgage-backed securities that is holding rates at their present attractive levels. Yellen is well respected in the Senate, and should enjoy a relatively easy confirmation. I am very happy that President Obama took my advice and selected Janet Yellen for this important post.

And Mr. President? Please feel free to consult me on any other appointments you may be considering. I’ll always take your call.

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